Texas Electricity Market Study

An analysis of the Electric Reliability Council of Texas’s competitive electricity market shows that reliability concerns can be best addressed through Texas’ world-class, energy-only market rather than through creating a “capacity” market, which would raise electricity prices for Texas consumers.

The analysis is detailed in a new study, Does Competitive Electricity Require Capacity Markets? The Texas Experience by Andrew Kleit and Robert Michaels, published by the Texas Public Policy Foundation.

“Concerns about reliability do need addressing,” said Bill Peacock, the Foundation’s vice president for research and director of the Center for Economic Freedom. “The answer, though, is not to abandon competition for the heavy regulation of a capacity market, but to decrease regulation in the Texas market so it can efficiently address the concerns.”

The study finds that there is enough profit potential in the Texas market today to incentivize new generation. As reflected in realistic reserve forecasts and the recent announcement of a new 800-megawatt natural gas generation plant in Brownsville, sufficient investment in generation in ERCOT is likely to continue and, as it has in the past, provide adequate reserves to maintain reliability.

said Andrew Kleit, Foundation senior fellow and professor of energy economics at Pennsylvania State University. “A Texas capacity market would be a source of inefficiency and a barrier to competition that would increase the cost of electricity for consumers.” ERCOT’s reliability challenges do not stem from any inherent flaws in electricity markets that render them incapable of functioning properly, according to the study. Instead, they are a result of intervention such as renewable energy

subsidies and price caps that has inhibited – or prohibited – innovation and kept the market from developing solutions to these highly complex issues.

“A capacity market is an institution in which people have no choice but to trade a contrived good that has little or no economic value,” said Robert Michaels, Foundation senior fellow and professor of economics at California State University, Fullerton. “Not only will a capacity market fail to address reliability concerns, its costs will almost surely exceed any benefits it might bring.”

The debate over the Texas electricity market has become national. The Federal Energy Regulatory Commission wants Texas to submit ERCOT to federal jurisdiction, while the North American Electric Reliability Corporation is pressuring Texas to go beyond already successful efforts to enhance reliability. Both of these would harm Texas’ energy-only market. The study may be found here.

Bill Peacock is the Vice President for Research and Director for the Center for Economic Freedom at the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin. The Texas Public Policy Foundation is a non-profit, freemarket research institute based in Austin.